[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Proposed Rules]
[Pages 37710-37711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18295]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40165; File No. S7-8-98]
RIN 3235-AH42


Year 2000 Readiness Reports To Be Made by Certain Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; request for additional comments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is re-
opening the comment period with respect to its proposal that would have 
required transfer agents to engage an independent public accountant to 
attest to specific assertions included in the transfer agent's report 
on Year 2000 compliance. The attestation by independent public 
accountants was one component of Rule 17Ad-18 under the Securities 
Exchange Act of 1934 proposed by the Commission in Release No. 34-
39726, which was published in the Federal Register on March 12, 1998 
(63 FR 12062).

DATES: Comments should be received on or before August 12, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission (``Commission''), 
450 Fifth Street, NW, Washington, DC 20549. Comments also may be 
submitted electronically at the following E-mail address: <a href="/cdn-cgi/l/email-protection#f082859c95ddfa939f9d9d959e8483b0839593de979f86">rule-
<span class="__cf_email__" data-cfemail="395a5654545c574d4a794a5c5a175e564f">[email protected]</span></a>. Comment letters should refer to File No. S7-8-98; 
this file number should be included on the subject line if E-mail is 
used. All comments received will be available for public inspection and 
copying at the Commission's Public Reference Room, 450 Fifth Street, 
NW, Washington, DC 20549. Electronically submitted comment letters will 
be posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, 202/942-4187; Thomas C. Etter, Jr., Special Counsel, 202/942-
0178; or Jeffrey Mooney, Special Counsel, 202/942-4174, Division of 
Market Regulation, Securities and Exchange Commission, 450 Fifth 
Street, NW, Mail Stop 10-1, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    At midnight on December 31, 1999, unless the proper modifications 
have been made, the program logic in many of the world's computer 
systems will start to produce erroneous results because, among other 
things, the systems will incorrectly read the date ``01/01/00'' as 
being the year 1900 or another incorrect date. In addition, systems may 
fail to detect that the Year 2000 is a leap year. Problems can also 
arise earlier than January 1, 2000, as dates in the next millennium are 
entered into non-Year 2000 compliant programs.
    The Commission views the Year 2000 problem as an extremely serious 
issue. A failure to assess properly the extent of the problem, 
remediate systems that are not Year 2000 compliant, and then test those 
systems could endanger the nation's capital markets and place at risk 
the assets of millions of investors. In light of this, both the 
transfer agent industry and the Commission are working hard to address 
the industry's Year 2000 problems.
    In a companion release also issued today, the Commission is 
adopting Rule 17Ad-18 \1\ under the Securities Exchange Act \2\ to 
require certain transfer agents to file reports with the Commission 
regarding Year 2000 compliance.\3\
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    \1\ 17 CFR 240.17Ad-18.
    \2\ U.S.C 78a et seq.
    \3\ Release No. 34-XXXXX, (XXXX X, 1998), (``Adopting 
Release'').
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II. Year 2000 Reporting Requirements

    Rule 17Ad-18 requires new Form TA-Y2K to be filed by each transfer 
agents whose: (i) Appropriate regulatory agency, as that term is 
defined by 15 U.S.C. 78(c)(34)(B), is the Commission; but (ii) is not a 
savings association, as defined in Section 3 of the Federal Deposit 
Insurance Act, 12 U.S.C. 1813, which is regulated by the Office of 
Thrift Supervision. Part I of Form TA-Y2K is a check-the-box Year 2000 
questionnaire. Each transfer agent that does not qualify for an 
exemption under Rule 17Ad-13(d) \4\ will also be required to file Part 
II of Form TA-Y2K, which requires a narrative discussion of its efforts 
to address Year 2000 Problems.
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    \4\ 17 CFR 240.17Ad-13(d). Generally, Rule 17Ad-13(d) exempts 
the following transfer agents from the rule's annual reporting 
requirements: issuer transfer agents, small transfer agents exempt 
under Rule 17Ad-4(b), and bank transfer agents.
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    Generally, Form TA-Y2K requires each transfer agent to discuss the 
steps it has taken to address Year 2000 Problems. Each transfer agent 
is required, among other things, to (i) indicate whether its board of 
directors, or similar body, has approved and funded written Year 2000 
remediation plans that address all mission critical computer systems; 
(ii) describe its Year 2000 staffing efforts; (iii) discuss its

[[Page 37711]]

progress on each stage of preparation for the Year 2000;\5\ (iv) 
indicate if it has written contingency plans to deal with Year 2000 
problems that may occur; and (v) identify what levels of management are 
responsible for Year 2000 remediation efforts.\6\
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    \5\ These stages are: (i) awareness of potential Year 2000 
Problems; (ii) assessment of what steps must be taken to avoid Year 
2000 Problems; (iii) implementation of the steps needed to avoid 
Year 2000 Problems; (iv) internal testing of software designed to 
avoid Year 2000 Problems; (v) integrated or industry-wide testing of 
software designed to avoid Year 2000 Problems (including testing 
with other transfer agents, other financial institutions, customers, 
and vendors); and (vi) implementation of tested software that will 
avoid Year 2000 Problems.
    \6\ The Commission refers members of the public to the Adopting 
Release for more detailed information about the reporting 
requirements and Form.
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III. Independent Public Accountant Review

    When the Commission originally proposed Rule 17Ad-18,\7\ the rule 
would have required each transfer agent to have an independent public 
accountant attest to several specific assertions included in its 
follow-up reports, now Part II of Form TA-Y2K.\8\ In reposnse to the 
proposing release, the American Institute of Certified Public 
Accountants (``AICPA'') commented that the required attestation report 
would be difficult for independent public accountants to provide.\9\ 
The AICPA said that some of the required assertions are not appropriate 
for accountant attestation because the assertions are not capable of 
reasonably consistent measurement against reasonable criteria. 
Currently, there are no established criteria related to Year 2000 
remediation efforts. The lack of established criteria would likely 
result in significant variation in the examination procedures performed 
by independent public accountants and thus reduce the usefulness of the 
attestation reports. In addition, the AICPA expressed concern that the 
purpose and conclusions of the attestation report could be easily 
misunderstood. The AICPA was primarily concerned that uninformed users 
of the attestation reports would place undue reliance on them.
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    \7\ Securities Exchange Act Release No. 39726 (March 5, 1998), 
63 FR 12062 (March 12, 1998).
    \8\ As proposed, each transfer agent would have been required to 
assert (i) whether it has developed written plans for preparing and 
testing its computer systems for potential Year 2000 Problems; (ii) 
whether the board of directors, or similar body, has approved these 
plans, and whether a member of the transfer agent's board of 
directors, or similar body, is responsible for executing the plans; 
(iii) whether its Year 2000 remediation plans address all domestic 
and international operations, including the activities of its 
subsidiaries, affiliates, and divisions; (iv) whether it has 
assigned existing employees, hired new employees, or engaged third 
parties to execute its Year 2000 remediation plans; and (v) whether 
it has conducted internal and external testing of its Year 2000 
solutions and whether the results of those tests indicate that the 
transfer agent has modified its software to correct Year 2000 
problems.
    \9\ This point was echoed by a number of other comment letters.
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    The AICPA suggested that an ``agreed-upon procedures'' engagement, 
instead of an attestation engagement, would more effectively meet the 
Commission's goals. Pursuant to such an engagement, a transfer agent 
would engage an independent public accountant to perform and report on 
specific procedures designed to meet the Commission's objectives. This 
would eliminate the variability of examination procedures performed by 
independent public accountants and thus increase the consistency of the 
reports received by the Commission. The AICPA's letter outlined 
elements of an agreed-upon procedures report and offered to follow-up 
with the Commission staff regarding the development of specific 
procedures for a Year 2000 engagement.
    In light of the above, the Commission has deferred consideration of 
the appropriate accountant's review of Part II of Form TA-Y2K that 
transfer agents that do not qualify for an exemption under existing 
Rule 17Ad-13(d) will be required to file by April 30, 1999, reflecting 
the status of the transfer agent's Year 2000 efforts as of March 15, 
1999. Accordingly, the Commission is reopening the comment period to 
obtain additional views, including comments on the feasibility and 
desirability of an agreed-upon procedures engagement. The public file 
(No. S7-8-98) contains the AICPA's original comment letter, received in 
the original comment period, the Commission's Initial Regulatory 
Flexibility Analysis, and will contain any subsequent letters submitted 
for the Commission's consideration.

    Dated: July 2, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18295 Filed 7-10-98; 8:45 am]
BILLING CODE 8010-01-P


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